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My filed comment with the FCC on special access

Posted August 3rd, 2016 in Broadband, capital, special access and tagged , by Alton Drew

In re: Docket No. 16-143, Business Data Services in an Internet Protocol Environment

The Federal Communications Commission should implement a light touch regulatory model for business data services. Where a carrier needs to purchase for resale facilities provided by an incumbent local exchange carrier, a competitive local exchange carrier, or a cable company, prices should be market-based where negotiations are conducted based on an exchange of value determined by the parties. Also, the Commission should re-evaluate what it means by the term “competition.” Competition has been erroneously interchanged with “consumer choice.” I provide my reasoning below.

Special access services have evolved seemingly exponentially since the early 1990s. Prior to the 1996 amendment of the Communications Act of 1934, special access services were indeed dominated by incumbent local exchange carriers. By the middle 1990s cable companies, the only other facilities-based entities that had any chance of competing with incumbent local exchange carriers, had a very small share of the alternative access or by-pass markets. What they did have was vision to develop and use, at that time, what was considered innovative DOCSIS technology, a technology that would help them acquire more of the residential and enterprise markets for internet access.

Resellers, on the other hand, could never, in my opinion, be considered serious providers of telecommunications services. Take residential services. There was nothing more disconcerting to me as a young staffer at the Florida Public Service Commission during the 1990s to see complaint after complaint filed against resellers only for resellers to blame an issue on an underlying carrier. In my opinion, if a carrier wanted to seriously serve the public interest, it should have entered the capital markets and raised the financing to build out its own facilities. Consumers would have been better served under that model.

Fast forward to the 21st century and it cannot be denied that cable companies and other facilities-based competitive local exchange carriers have entered the special access markets offering business and enterprise customers alternatives to incumbent local exchange carriers. Business and enterprise customers can choose between incumbent local exchange carriers, competitive local exchange carriers, and cable companies for special access services.

Regarding the pricing of inputs i.e. lines that one type of carrier may have to purchase from another type of carrier for the purpose of providing special access services, prices should be determined in the market during negotiations between carriers. The Commission is not in a position to determine the value that the parties place on an exchange. That is not the Commission’s expertise. Only the carriers can best determine the value of the consideration being exchanged and the appropriate price. Each construction, deployment, or sale of special access facilities will differ for a number of reasons including location, business climate, capital markets, etc., information that private parties have better access to and more incentive to gather and get right.

The Commission believes it should insert itself heavily into pricing matters based on the premise that by doing so, it will bring about competition and garner better results for the consumer. This premise stems from an incorrect meaning of competition. Consumers have a greater number of carriers to choose from when there are a greater number of carriers that have determined that there are ample resources at a reasonable price to compete for in order to provide a service. Before an entity competes for a single customer, the ultimate resource that allows the entity to pay for all other resources, it has to compete for financial capital, land, labor, and entrepreneurial skillsets necessary for creating and selling its product and services. The Commission, in arguing a lack of “competition” in the business data services market, has not demonstrated that sufficient financial and natural capital exists in order to incentivize a provider to enter a market and meet consumer demand. Even if the Commission could make such an assessment, the Commission would next have to document the level of market failure, an exercise I doubt the Commission would want to endeavor given its knack for avoiding in-depth economic analysis.

Lastly, where a reseller or facilities-based carrier wishes to purchase facilities from another carrier, carriers should not be compelled to maintain legacy analog networks for this purpose. If consumer welfare is the Commission’s concern, then resellers should purchase digital facilities thereby furthering the use of more advanced technologies for the provision of broadband access.

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Crude oil is a poor analogy for business data services

Tom Wheeler, chairman of the Federal Communications Commission, in a remarks delivered to INCOMPAS recently likened special access or business data services to crude oil given crude oil’s impact on energy prices. As a barrel of crude grudgingly inches higher (now up almost seven dollars from last week and hovering around $42.), prices at the pump have increased as well (although still $.34 a gallon less than last year).

Mr. Wheeler’s comparison struck me at first as a weak attempt to tie special access prices to the prices consumers pay for broadband. I can see that argument for being made for mobile broadband prices given that the costs for ordering special access services are built into the price consumers pay for accessing broadband services.  For other industries such as banking and large grocery chains, the cost for procuring special access is probably built into bank fees or the price per pound of potatoes.

But the reason crude oil is a poor analogy is because its price is not regulated by a government agency although some of its supply may be controlled by the output decisions of a cartel. The prices for special access services, especially those provided by so called dominant carriers, are regulated by the Commission. Rather than hint at letting regulation go if competition is identified, Mr. Wheeler should just go all out and deregulate the industry, period. Mr. Wheeler’s technology-neutral principle is on point and in line with that of INCOMPAS and Verizon, two entities that, by their own admission, don’t agree on much when it comes to special access. Mr Wheeler, INCOMPAS, and Verizon also see eye-to-eye on promoting the movement from legacy TDM services to IP services, arguing that enterprise clients want digital services versus legacy services.

But saying we’ll promote competition after we see competition doesn’t incentivize more private capital to enter the business data services markets to fund additional deployment. That’s the type of uncertainty that scares capital away. Demand for special access services and the price set when providers and business enterprises decide to enter an agreement for such services should be the framework for regulating the market. Private capital is always prepared for high risk with the flip side providing high reward, but not with a regulator ready to erode those rewards.

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Regulating special access services means confused market signals

Posted March 21st, 2016 in Federal Communications Commission, special access and tagged by Alton Drew

The Federal Communications Commission is adding to uncertainty in the market for special access services first with its long dragged out special access data process and second with a philosophy that says it needs a triggering mechanism for declaring competition in the first place.

For the past decade and a half the Commission has been having second thoughts about its scheme for regulating special access. It has concluded that it lacks the appropriate amount of data upon which to create an adequate framework for rate regulation. The Commission is using a “consumer harm” argument to justify intrusion into a market that has seen alternative providers competing for market share since the mid to late 1990s. That argument distracts the Commission from where the real focus should be, namely on capital flow, investment, and deployment. Regulation never optimizes the valuation of a company’s investment into providing a service. This failure on the part of regulation makes capital think twice about investing which means reduced special access deployment and ironically the very increases in special access pricing the Commission seeks to avoid.

Parties such as Free Press and Public Knowledge have been making the argument that incumbent local exchange carriers such as AT&T and Verizon have market power as expressed in unreasonable rates and onerous terms and that the current regime limits investment by competitive carriers and wireless companies. They also support the suspension by the Commission of competitive market triggers that would relax price regulation of special access services where market proxies demonstrate that competition exists.

The Phoenix Center, a think tank, counters the Free Press and Public Knowledge arguments by pointing out that forcing special access prices down via regulation would discourage alternative providers from entering the special access market. Monopoly pricing is necessary for the recovery of fixed costs and higher prices attracts competitive providers and their investors.

And it’s not like investors should be concerned about the financial health of alternative providers since, according to the Internet Innovation Alliance, competitive providers based, on their stock valuations, have a positive outlook on their future.

I’ve argued before that competitive local exchange carriers and cable companies started carving out their niches in the telecommunications space by offering special access or “by-pass” services. It is hard to imagine that after over two decades of performance and growth that now these very same competitive providers need help.

What the Commission must do is avoid a “one size fits all” approach to special access. The Commission, to its credit, wanted to avoid a one size fits all with its competition triggers. The Commission should go one step further and presume a special access market that is already competitive; that prices are signaling a market ready for entry by alternative providers. The Commission should put the burden on providers to demonstrate that actions on the part of incumbents are working to keep alternative providers out of the special access market. The criteria upon which a conclusion is based should be developed by the Commission, providers of special access, and their enterprise customers.

Additional regulation of special access devalues invested capital

Larry Downes, senior research fellow at the Georgetown Center for Business and Public Policy, wrote a paper describing how additional regulation of the special access market may have a negative impact on continued innovation. I agree that the added uncertainty stemming from the Federal Communications Commission’s regulation of the special access market would make firms think a little longer about upgrading facilities. I don’t see why it’s necessary for the Commission to favor competitive local exchange carriers a quarter of a century after they started posing a threat to incumbent local exchange companies. Just the very distinction between CLEC and ILEC seems a bit anachronistic. In the 21st century Comcast and Verizon are competing on the same playing field. I don’t see why the Commission needs to go back to the 1990s.

In addition, such a regulatory tack back to the past should make investors shudder. Additional regulation creates a heightened risk that discounts the capital put into the enterprise communications services market. That’s business geek for special access. Increased competition from CLECs not only increases the supply of special access providers but drives down prices and revenues for incumbents. According to Mr. Downes in the 1980s incumbents controlled over 90% of the special access market. Now that control is down to 40%. A decrease in expected revenues serves to reduce the value of capital invested. Investors may take their capital elsewhere.  CLECs and ILECs alike may find themselves competing for capital in addition to enterprise customers. Markets are already uneasy about expected increases in borrowing rates. Declining revenues brought on in part by regulatory policy that favors some special access players over another does not help.

So far the bulk of the comments by Commission members on the special access proceeding has been on the necessity for data collection that gives an accurate view of the special access markets. Given the Commission’s issuance of Title II rules for net neutrality, I expect that the Commission will continue down the path of more regulation in the special access markets as well.

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Precedence and Clarity Require FCC Subject Its Rulings to Public Hearing

I have some preliminary thoughts on additional transparency at the Federal Communications Commission. During my heyday at the Florida Public Service Commission, no major rule or other policy change was implemented without an evidentiary hearing. This type of openness provided both investors and consumers the ability to weigh in on an issue and helped ensure that the PSC met its duty to balance the interests of consumers and investors alike.

Not only did the PSC balance these interests by being open and transparent in their deliberations, but they also established a clearer record of precedent. This is the approach that the FCC needs to apply on a going forward basis in its decisions. Recent findings in the Commission’s special access ruling and the decision on the spectrum transaction between Verizon and SpectrumCo LLC provide examples on how a lack of an evidentiary hearing can send mixed signals about promotion of competition and free markets.

For example, the FCC concluded that it should suspend its special access rules that granted pricing flexibility to carriers facing competition. The FCC believes now that there is evidence the rules are not reflecting competition for special access.

However, in its review of the Verizon-SpectrumCo LLC license acquisition, the FCC concluded that the cable companies do not have the ability, at least in the near term, to cause anti-competitive harm in broadband services. In addition, a significant increase in backhaul rates is unlikely to impact subscribers.

So in special access, an important component of backhaul, the FCC doesn’t know whether there is competition, but in a spectrum docket, the FCC concludes in effect that there will be no anti competitive or anti consumer impact resulting from an increase in backhaul rates.

There has to be some reconciliation of the special access market with pricing impacts in the backhaul market and only a precedent setting evidentiary hearing can do this.